States, DOJ to meet on Microsoft

State prosecutors are planning to meet next week with the Justice Department to discuss possible joint actions against Microsoft, sources say.

February 18, 19981:00 PM PST

Antitrust prosecutors from several states are preparing to meet next week with Justice Department officials to discuss strategies for legal action against Microsoft, sources familiar with the matter have told CNET's NEWS.COM.

Prosecutors from six to a dozen states are expected to attend the session, which would be the first time federal and state officials have met face to face to discuss Microsoft's business practices. Prosecutors have pursued various inquiries into Microsoft, but their actions so far appear to have been independent of one another.

Speaking on the condition of anonymity, one scheduled participant characterized the meeting as an exploratory session in which parties would "try to see if there is common ground among the states and the DOJ in order to move forward" on potential joint efforts against Microsoft.

"There is such a large set of anticompetitive behaviors that Microsoft is being charged with that people are naturally going to disagree about what is the worst," this source said. Referring to a combined action a number of states have taken against cigarette companies, this source added: "It's not like tobacco, where the egregious behavior was singular and clear.
Here there's a wide range of issues."

A spokesman said Microsoft executives are not aware of any upcoming meetings between state and federal officials, but said the company is continuing to cooperate with their investigations. "It's important to remember that all of the hallmarks of healthy competition are in place in this industry," said Microsoft's Jim Cullinan. "Prices continue to fall, innovation is thriving, barriers to entry are low and competition is vigorous. Consumers are benefiting from the tremendous competition in the
industry."

It remains unclear how the meeting will fit into the expanding offensive against Microsoft. Although some legal observers say the states may have little to add to the federal investigation, their attorneys general could still bring action on their own or bolster particular aspects of the Justice Department's case, which has taken a number of turns.

Already pressing a high-profile enforcement action alleging that Windows licensing requirements violate terms of a 1995 antitrust settlement, the federal government has said it is also pursuing a much broader investigation of Microsoft. The Justice Department is closely scrutinizing all kinds of activities that might be the subject of a new lawsuit, ranging from deals the company brokers with content companies to the software giant's $150 million investment in Apple Computer.

At the same time, individual state investigations are becoming increasingly visible. Earlier this month, New York Attorney General Dennis Vacco announced that he and ten other state prosecutors had subpoenaed Microsoft for information relating to possible anticompetitive activities. The announcement was made two months after
representatives from at least nine states met in Chicago to discuss Microsoft without participation by the Justice Department.

Other states known to be investigating Microsoft include California, Connecticut, Illinois, Massachusetts, South Carolina, Texas, and Wisconsin. Yesterday, a Texas judge threw out a suit filed by the state's attorney general alleging that confidentiality requirements Microsoft imposes on its business partners and customers were impeding an investigation. A spokeswoman for the agency said that officials have not decided whether to appeal but that the state's probe would continue.

Florida, Iowa, and Minnesota are widely believed to be investigating Microsoft as well, but officials from those states would neither confirm nor deny that an inquiry was under way. Neither the Justice Department nor state attorneys general would publicly comment on whether a meeting was taking place.

Still, a number of legal and industry analysts say a meeting among state and federal competition enforcers would be the next logical step in Microsoft's plight. For one thing, while their relationship during the decidedly free-market Reagan administration was often antagonistic, state and federal antitrust divisions have slowly resolved their differences since then. The groups now regularly discuss important issues such as whether or not to take action against large mergers.

"In a high-profile kind of investigation like this, both sides want to
reassure the other that they're not in front of the other or working at
cross purposes," said Kevin Arquit, a former Federal Trade Commission attorney who practices antitrust law with the firm of Rogers & Wells. "[A meeting] is consistent with
the relationship the two have presently."

Another reason a meeting makes sense comes down to relatively lean state resources and
experience in antitrust matters. Robert Lande, a professor specializing in
antitrust issues at the University of
Baltimore School of Law, estimated that a full-scale antitrust suit
against Microsoft could require at least 50 people--and possibly many
more--working full time on the case.

"If [individual states] cannot come up with enough resources to tackle
Microsoft themselves, then they may be forced to join the DOJ in their
suit," Lande said.

Besides numbers, the federal government brings a significantly greater
expertise in the arcane world of antitrust and technology litigation,
several analysts pointed out. For the most part, "the states historically have not had any real expertise or skill in handling antitrust cases," said William Kovacic, an
antitrust professor at George
Mason University School of Law. "In terms of analysis, they don't bring
much to the table."

Lloyd Constantine, a former chief of New York's antitrust division who also
headed the antitrust task force for the National Association of Attorneys General,
agreed. Because the states are at such a disadvantage
prosecuting Microsoft, he said, they have good reason to join forces with federal
antitrust enforcers who have been investigating the software giant for
more than seven years.

"AGs get lots of pressure about Microsoft. They want to be seen doing
something," said Constantine, of Constantine & Partners in
New York City. At the same time, he added, "their ability to be a
significant part of the equation is severely compromised by the fact that
they're starting way too late."

In addition to state and federal investigators, the Redmond,
Washington-based company is defending itself against a private antitrust suit filed
by Caldera and is facing scrutiny
from the Senate Judiciary
Committee and arms of the European Commission and
the Japanese government.

Sources familiar with the state-federal meeting declined to give specifics about the
agenda, except to say that it was likely to include "more process issues
than substantive issues." That, however, does not mean that there is any shortage of
substantive issues to discuss.

Over the last year, details about state and federal investigations have slowly
emerged, mainly through subpoenas known as civil investigative demands. Based on them, investigators appear to be scrutinizing a wide variety of Microsoft conduct, including:

The "tying" of the Internet Explorer browser to Microsoft's dominant Windows
operating systems. Under antitrust law, this practice is illegal if it is
unnecessary or carried out merely to extend an existing monopoly into a new
market. In its current case, the Justice Department is specifically taking aim at Microsoft's requirement that Windows 95 and its browser be shipped together, but there has been speculation that this action might be part of a newer, broader suit.

Deals with companies providing content over the Internet. Starting in December, the Justice Department had issued civil investigative demands to companies such as Wired, AudioNet and CNET--publisher of NEWS.COM--relating to their business dealings with Microsoft.
Attention appears to be focused on requirements Microsoft puts
on companies who want prime real estate on the Windows desktop.

A number of miscellaneous matters, including Microsoft's foray into
electronic commerce markets such as travel, banking, and Webcasting,
and allegations that it is attempting to "balkanize" Sun Microsystems' Java programming language.

While the Justice Department declined to confirm or deny the existence of a meeting with state prosecutors, an official said such a session would not be significant. "Communication between states and the Justice Department about matters that are pending before both is quite routine and in itself unimportant," said the official, who did not want to be named.

Constantine agreed, adding that states most likely would be relegated to
playing a "supporting role" in any new case the Justice Department might
bring. "I don't think [Microsoft] is going to have to spend a lot of time
worrying about the states."

Others were not so sure. "A meeting would be unusual," said the University
of Baltimore's Lande, noting that state antitrust enforcers rarely meet
in person with their federal counterparts. Still, he cautioned, "a
meeting doesn't necessarily mean they would bring a joint action."